Mondelēz International’s shares closed up more than 6 percent yesterday as the company raised its profit outlook for the year.
The snack maker said its third-quarter earnings fell 11%, hit by weaker revenue, but the the bottom line was still stronger than expected.
Mondelēz expects per-share earnings of $1.82 to $1.87, up from its previous estimate for $1.64 to $1.69.
Earlier this year, Mondelēz unveiled plans to combine its coffee portfolio with D.E. Master Blenders 1753 BV to create a new coffee company, as part of a $3.5 billion restructuring program.
“We continue to drive top-tier earnings growth and margin expansion in a challenging operating environment,” said Irene Rosenfeld, Chairman and CEO. “With global retail and consumer demand expected to remain soft in the near term, we’re sharply focused on the execution of our productivity and cost-reduction programs to drive earnings growth. At the same time, we’re continuing to make the foundational investments in our brands, route-to-market capabilities and supply chain to capture growth in our categories as they accelerate, especially in emerging markets.
“By successfully reducing costs in the near term while investing for the long term, we’ve driven Adjusted Operating Income margin expansion of at least 100 basis points and double-digit Adjusted EPS growth on a constant-currency basis for three consecutive quarters, while delivering solid organic revenue growth. As a result, we’re raising our full-year guidance for both Adjusted Operating Income margin and EPS and maintaining our organic revenue outlook for 2014.”
On a reported basis for the third quarter, net revenues were $8.3 billion, down 1.6 percent. Operating income was $853 million, down 32.4 percent, including a negative 27.3 percentage point impact from cycling the prior-year reversal of an indemnity accrual related to the 2010 acquisition of Cadbury and a negative 17.5 percentage point impact from restructuring costs. Diluted EPS was $0.53, down 3 cents, including the negative 28 cent impact of the items listed above, partially offset by a 15 cent benefit from the mark-to-market adjustments of currency forward contracts associated with the planned coffee business transactions.
Year to date, reported net revenues were $25.4 billion, down 1.5 percent. Operating income was $2.7 billion, down 10.4 percent, including a negative 12.1 percentage point impact from cycling the prior year reversal of an indemnity accrual related to the 2010 acquisition of Cadbury and a negative 7.8 percentage point impact from restructuring costs. Diluted EPS was $0.98, down 22 cents, including a loss of 18 cents related to debt extinguishment and a negative 6 cents from the remeasurement of net monetary assets in Venezuela.
Organic Net Revenue
Third quarter Organic Net Revenue increased 2.7 percent. Overall, pricing was up 5.8 percentage points, as the company realized the effects of cost-driven pricing actions implemented over the course of the year. Volume/mix declined 3.1 percentage points. In addition to price elasticity, the decline was largely due to a slow response by competitors to higher input costs and continued significant price-related customer disruptions, primarily in France. Coffee revenues were a 0.4 percentage point headwind in the quarter as the benefit of higher coffee pricing was more than offset by lower volumes associated with elasticity and the European customer disputes.
In the third quarter, Organic Net Revenue from emerging markets was up 9.0 percent, while developed markets decreased 1.3 percent. Overall, Power Brands grew 5.1 percent.
On a regional basis:
- Latin America increased 18.5 percent, largely driven by pricing gains, especially in the inflationary economies of Venezuela and Argentina. Brazil grew mid-teens including a positive contribution from volume/mix and solid growth across all categories.
- Asia Pacific was up 1.3 percent as higher pricing was mostly offset by lower volume/mix. China was up high-single digits behind stepped-up innovation and marketing support as the business cycled the prior year’s weak results in biscuits. India delivered another quarter of double-digit growth.
- EEMEA was up 5.6 percent despite political and economic volatility as higher pricing was partially offset by lower volume/mix. Russia grew mid-teens, with solid performance across most categories and contributions from both volume/mix and pricing.
- Europe was down 2.4 percent. Volume/mix declined due to pricing-related elasticity across the region and customer disruptions, particularly in France.
- North America was essentially flat, down 0.2 percent, reflecting slower growth in biscuits offset by declines in confections.
Operating Income and Diluted EPS
In the third quarter, Adjusted Gross Profit increased 3.1 percent on a constant-currency basis. Adjusted Gross Profit margin was 37.7 percent, up 0.4 percentage points. Higher prices and a strong contribution from supply chain productivity offset input cost inflation.
Adjusted Operating Income grew 16.5 percent on a constant-currency basis. Adjusted Operating Income margin expanded 1.4 percentage points to 13.6 percent, driven primarily by strong gains in Europe and North America. The company continued to reduce overheads by aggressively managing costs. In addition, the company maintained working media support while lowering overall advertising and consumer expense by driving efficiencies through consolidating providers, reducing non-working costs and shifting spending to lower-cost, digital outlets.
Adjusted EPS grew 32.5 percent on a constant-currency basis, driven by operating gains, lower interest expense and share repurchases.
Share Repurchases
In the first nine months of the year, the company repurchased $1.2 billion of its common stock at an average price of $35.33 per share.
Outlook
“We took another strong step toward our longer term margin goals in the third quarter,” said David Brearton, Executive Vice President and CFO. “We continue to execute our cost-reduction programs to deliver sustainable margin improvement and earnings growth. As a result, we now anticipate Adjusted Operating Income margin of approximately 13 percent for 2014. Additionally, we’re increasing our Adjusted EPS target range by 9 cents as we pass through the benefits of tax and interest favorability, as well as operating gains.”
Conference Call
Mondelēz International will host a conference call for investors with accompanying slides to review its results at 10 a.m. ET today. Investors and analysts may participate via phone by calling 1- 800-322-9079 from the United States and 1-973-582-2717 from other locations. Access to a live audio webcast with accompanying slides and a replay of the event will be available at www.mondelezinternational.com/Investor.
